The process of adding transaction records to the blockchain, the public ledger used by Bitcoin (BTC), is known as mining. It is a crucial component of the Bitcoin network as it solves the so-called “double-spend problem.”
The need to reach agreement on a transaction history is known as the “double-spend problem.” Public-key cryptography enables the mathematical demonstration of Bitcoin ownership. However, cryptography by itself cannot ensure that a specific coin hasn’t already been sent to someone else.
An agreed-upon ordering, based, for instance, on the time each transaction was created, is necessary to create a shared history of transactions. However, since anyone who provides external input has the ability to manipulate it, participants must have faith in them.
In this article, we’ll talk about what cryptocurrency mining is, how to mine bitcoin, how it works, how much it costs to mine bitcoin, whether mining bitcoin is legal, and the various issues that bitcoin miners encounter.
Table of Contents
How Does Bitcoin Mining Work?
Mining (blockchain mining in general) makes use of financial incentives to offer an accurate and trustworthy method of data arranging. The third parties ordering transactions are distributed and are compensated financially for acting ethically. However, as long as the majority of people continue to be honest, any misbehavior results in a loss of economic resources.
In the case of Bitcoin mining, this outcome is attained by producing a series of blocks that can be mathematically proven to have been stacked in the proper order with a specific investment of resources. A cryptographic hash, a method of standardizing data encoding, is what the process depends on in terms of its mathematical properties.
Hashes are a one-way encryption tool, making it nearly impossible to decrypt them back to their input data unless every possible combination is tested until the outcome matches the given hash. Therefore, how is Bitcoin mined?
This is what Bitcoin miners do: They cycle through trillions of hashes every second until they find one that satisfies a condition called “difficulty.” The condition simply requires that the hash be smaller than the difficulty because both the difficulty and the hash are very large numbers expressed in bits.
Every 2016 Bitcoin block, or roughly every two weeks, difficulty is updated to maintain a constant block time, which refers to how long it takes to find each new block while mining.
The information from the block header makes up the hash that miners produce, which is used to identify any given block. The Merkle root, another aggregated hash that contains the signatures of every transaction in that block, and the distinct hash from the previous block are the two most crucial parts of the hash.
The expected hash of a block, as well as the hash of every subsequent block, would be noticeably altered if even the smallest component of a block were to change. This incorrect blockchain would be immediately rejected by nodes, preventing tampering with the network.
The difficulty requirement ensures that Bitcoin miners put in real work—the time and energy spent hashing through all of the potential combinations. This is why Bitcoin’s consensus protocol is called “proof-of-work,” to distinguish it from other types of block-creation mechanisms. Malicious parties have no other option than to recreate the entire mining power of the network in order to attack it. That would run into the billion dollar range for Bitcoin.
How long does it take to mine one bitcoin, though? Typically, it takes 10 minutes to create one BTC, but this is only true for powerful processors. How quickly you can mine depends on the equipment you use for Bitcoin mining.
Why Mine Bitcoin?
The mining of bitcoins is similar to gold mining in many ways. In the case of Bitcoin, cryptocurrency mining is a computer-based process that generates new bitcoins and keeps track of ownership and transactions. Mining for bitcoin and gold both uses a lot of energy and can result in large financial rewards.
As a result, mining BTC can help you profit or receive rewards. By pooling their resources with other miners, some BTC miners create Bitcoin mining farms. Working in teams gives groups of miners a greater opportunity to reap rewards and divide the profits. In addition, a mining pool’s members must pay a fee to join.
If you like playing with computers and learning about new technology but aren’t focused on making money, you might want to mine bitcoin. You can gain knowledge about how your computer and blockchain-based networks function, for instance, while configuring Bitcoin mining.
Is Bitcoin Mining Worth It?
Please perform a cost-benefit analysis (using online calculators) to determine whether Bitcoin mining is worthwhile in order to find the answer to the aforementioned query. Organizations use a cost-benefit analysis as a methodical approach to decide which actions should be taken and which should be avoided.
Before devoting your resources, you should first decide whether you are willing to invest the necessary start-up money in hardware and assess the level of difficulty and the expected future value of Bitcoin. The amount of difficulty associated with the cryptocurrency you want to mine must also be considered in order to determine whether the mining operation would even be profitable.
When both Bitcoin prices and mining difficulty decline, it typically means fewer miners are mining BTC and that buying BTC is simpler. But as Bitcoin prices and mining challenges rise, anticipate more miners to contend for fewer BTC.
Is Bitcoin Mining Legal?
When taking into account the acceptance by different jurisdictions, the answer to the question “is mining bitcoin legal?” is “yes.” For instance, Enigma, an Iceland-based company, launched one of the largest Bitcoin mining operations ever.
In Israel, cryptocurrency mining is regarded as a business and is therefore taxed as such. On the other hand, cryptocurrency miners are regarded as money transmitters by the Financial Crimes Enforcement Network (FinCEN) in the United States, which may make them subject to the laws governing that conduct.
In addition, near the base of the Conchagua volcano, a new “Bitcoin city” will be built in the shape of a coin, as announced by Nayib Bukele will take office as president of El Salvador in November 2021. All over the city, geothermal energy will be used to power bitcoin mining. El Salvador will raise a billion-dollar “Bitcoin bond” with the help of crypto infrastructure provider The city’s construction will begin with Blockstream.
Bitcoin mining is not allowed in Algeria, Nepal, Russia, Bolivia, Egypt, Morocco, Ecuador, or Pakistan. To determine whether Bitcoin mining is allowed in your area, you should always check the local laws where you live.
How Are Bitcoin Miners Paid?
The network rewards miners for creating new blocks as a way of thanking them for their efforts in mining bitcoin. The new Bitcoin that is created with each block and the transaction fees that users pay to use the network are the two different types of rewards. But what does a miner make?
The majority of the miners’ income comes from the block reward, which is the amount of newly created Bitcoin, which as of May 2020, was 6.25 BTC. So that eventually no more Bitcoin is mined and only transaction fees will ensure the security of the network, this value is programmed to halve at fixed intervals of about four years.
Only 80,000 of the 21 million Bitcoin will be available for purchase by 2040, and the block reward will have dropped to less than 0.2 BTC. As the last Bitcoin is slowly mined, mining won’t actually come to an end until after 2140.
The block reward is halved every so often, but in the past, price increases for Bitcoin have more than made up for those reductions. Bitcoin miners benefit from a relative level of certainty about their prospects, though this is not a guarantee of future outcomes. Since Ethereum, another significant mineable coin, is not being phased out like the current mining arrangement, the community is very supportive of it. Individual Bitcoin miners can be sure that the business will succeed under the right circumstances.
Mining is a highly competitive industry, but it is still fairly simple to get started. In the early days of Bitcoin, enthusiasts could simply boot up some software on their computer and get started right away. Although those times are long gone, setting up a dedicated Bitcoin miner is not as difficult as it may initially seem.
How to Choose Hardware for Bitcoin Mining?
If you’re curious about how to mine Bitcoin, the first thing to keep in mind is that you can only mine BTC by purchasing a Bitcoin mining device, i.e., an ASIC, or application-specific integrated circuit, is a type of electronic device.
Only Bitcoin can be mined with these devices, but they are very effective at it. Due to their high efficiency, the other types of computing mining equipment were quickly rendered obsolete after their introduction in the year 2013.
You should consider alternative coins if you want to mine with standard CPUs, GPUs, or more sophisticated FPGAs. These machines can mine Bitcoin, but they do so so slowly that it is a waste of time and electricity.
For comparison, the AMD 7970, the top graphics card at the time ASICs became more popular, generated 800 million hashes per second. Now, the average ASIC generates 100 trillion hashes per second, a difference of 125,000-fold.
The number of hashes produced in a second is commonly referred to as the “hash rate” and it is an important performance measurement for mining devices.
When buying a Bitcoin mining device, you should also take into account two additional factors. The first is the amount of electricity used, expressed in watts. The one that uses the least amount of electricity between two devices that generate the same number of hashes will be more profitable.
The cost per unit for each device makes up the third metric. The world’s most energy-efficient ASIC is useless if it takes ten years for mining to pay for it.
Manufacturers of ASICs for Bitcoin have a comparatively active market, and they frequently have different views on these three criteria. While some might create ASICs that are more effective but also more expensive, others might create hardware that is less effective but less expensive. It’s crucial to comprehend the additional factors affecting Bitcoin mining profits before determining which device will suit your needs the best.
The Economics of Mining Bitcoin
Bitcoin mining is very similar to the real estate industry in that it is all about location. The average cost of electricity will vary depending on where in the world you are. Many developed nations have prohibitively expensive residential electricity, making it difficult for mining to be profitable.
Bitcoin mining in residential areas is too expensive due to the high cost of electricity, which frequently costs $0.15 to $0.25 per kilowatt-hour.
Professional bitcoin miners frequently locate their operations in places with very cheap electricity. The Sichuan region of China, Iceland, the Irkutsk region of Russia, as well as a few regions in the United States and Canada, are just a few examples. These areas typically have some type of locally produced, inexpensive electricity generation, like hydroelectric dams.
These Bitcoin miners frequently receive prices below $0.06 per KWh, which are typically low enough to generate profits even during market downturns. Prices below $0.10 are generally advised to maintain a robust operation. Situational factors heavily influence where to locate a mine. While those in developed countries are likely to face higher entry barriers, people in developing countries might not even need to leave their own homes.
Is Bitcoin Mining Profitable?
A miner’s profit and revenue are significantly influenced by market conditions and the presence of other miners in addition to the hardware they use. The price of Bitcoin may soar higher during bull markets, increasing the dollar value of the BTC they mine.
Bull market inflows are balanced out, though, by additional Bitcoin miners who see the rising profits and buy more equipment to access the revenue stream. As a result, each miner now produces less Bitcoin than they did previously.
Eventually, the revenue generated tends toward an equilibrium point where less productive miners start to earn less than they spend on electricity, turning off equipment and allowing others to earn more Bitcoin.
This typically takes place over time. There is a lag because ASICs can’t always be produced quickly enough to offset the rise in the price of bitcoin.
In a bear market, the opposite rule applies: Revenue declines until miners start shutting down their equipment in large numbers. Existing Bitcoin miners need to find a location and hardware setup that will keep them competitive rather than allow them to be outcompeted. As more advanced hardware can completely stifle the profits of older miners, they must also constantly maintain and reinvest their capital.
Comparison of Mining Hardware Profitability
One can quickly check the profitability of a mining device online using a number of calculators on websites like AsicMinerValue, CryptoCompare, and Nicehash. It’s also possible to estimate profit manually with the following formula:
This is the formula that many of these calculators employ, and it merely equals your portion of the network’s total hash rate divided by the amount of money the network has issued overall in dollars. The input values needed can either be found on data websites like Blockchain.com or Coinmetrics (where the block time for Bitcoin is 10 minutes, resulting in six blocks mined in an hour and 144 in a day) or they can be fixed parameters.
The cost of electricity must also be deducted in order to calculate the profit. This can be done by simply multiplying the device’s power consumption by 24 and the price per kilowatt hour of electricity, thanks to the equivalence between kilowatts and kilowatt hours.
The table below shows the most popular ASICs currently available along with their payback times, or how long it will take to break even on current sales. It’s important to keep in mind that a Bitcoin miner’s earnings fluctuate greatly over time, so extrapolating results for a single day in the future can produce unreliable results. Nevertheless, it’s a helpful metric to grasp the relative efficacy of each device.
The table shows that none of the ASICs make money at $0.20 per KWh prices. While older models may be a tempting option if electricity is inexpensive, the relative performance of each new-generation ASIC is largely the same.
As an illustration, the Canaan AvalonMiner 1066, despite being a fairly dated model, is competitive in the low electricity price range due to its low energy efficiency and low price. Due to its lower price, the Bitmain S17 Pro, an older generation ASIC, maintains its market share, but when the reference electricity price rate is increased, it quickly loses its appeal. The performance of MicroBT’s hardware for mining appears to be the most balanced overall. Now, the Bitmain Antminer S19 series is the most profitable bitcoin miners in the market.
The fact that this table was created during a bull market is one last thing to take into account. Profits could be higher than average, but the 2020 Bitcoin halving is still recent and could offset the effect with lower Bitcoin issuance.
Buying and Setting Up the Hardware
While some manufacturers also permit direct purchases, many stores sell ASICs to retail customers. Even though they are harder to find than standard graphics cards, anyone can purchase an ASIC for a reasonable price. It should be noted that purchasing mining equipment from retailers or manufacturers shipping from other nations may result in high import duties.
A power supply unit may not be included with ASICs; in this case, a separate power supply unit must be purchased, depending on the manufacturer or retailer. PSUs designed for servers or gaming computers can also be used, though they may need special modifications. Some ASIC manufacturers sell their own units.
ASICs require an ethernet cable to connect to the internet, and they can only be set up using a web browser by navigating to the local IP address, much like a home router.
Prior to moving forward, it is necessary to create an account with a preferred mining pool, which will then offer comprehensive instructions on how to connect to its servers. You must enter the pool’s connection endpoints and account details from the ASIC’s web panel. The miner will then start producing Bitcoin and start working.
It is highly recommended that you mine through a reputable pool because you can generate consistent returns by pooling your hardware with others. Your device will still be compensated for its contribution to mining even if it can’t always find the right hash to add to a block.
Considerations and Risks of Bitcoin Mining
The management of high-power devices like ASICs entails technical risks in addition to the monetary risk of not making a profit. The mining equipment must have adequate ventilation to prevent components from overheating and burning out. One ASIC is most likely the most potent appliance in your home or office, dissipating all of the miner’s electricity consumption as heat into its surroundings.
That also means that when mining bitcoins, you should carefully consider the limitations of your electrical grid. The electrical system in your home has a maximum power rating, and each socket also has a rating. If those limits are exceeded, it’s very likely that electrical fires or frequent outages will occur. If you want to know if your Bitcoin mining setup is secure, consult a professional.
The mining equipment must undergo routine maintenance to protect it from dust and other environmental hazards. ASICs can lose functionality sooner than anticipated without proper maintenance, despite the fact that failures are relatively uncommon.
Even though individual ASICs could fail, the possibility that they might become obsolete poses the biggest risk to their profitability. Over time, more productive miners will displace less advanced ones.
Before becoming unprofitable under any electricity price scenario (except zero), historical generations of miners, such as the Bitmain S9, which was introduced around 2016, lasted roughly four years. The rate of technological advancement in computing, however, is largely unpredictable.
The mining of bitcoins is just like any other business. Both rewards and risks could be possible. This guide should have served as a good starting point for further analyzing both.